While the delay in IMFs fourth review has less to with the governments delaying the earlier agreed upon power tariff increase, it may well have a bearing on the final outcome. In pure economic sense, increasing the power tariff is direly needed. It is because the cost of generation continues to be higher than the units sold. And also, the circular debt has continued to mount despite some efforts.
The cabinet meeting on the overbilling issue held on September 22 stated that the middle -class was the most affected segment from the tariff increase last year. The increase in per unit cost for this income group was touching 62 percent. The overbilling on top of this was enough to add fuel to the fire, especially when the Water and Power ministry itself acknowledges that the load-shedding has only slightly decreased.
What is more worrisome is that the power generation cost over the past year has gone up by 5.2 percent, due to inefficiencies and theft in gencos. And this is where the dilemma lies. Should the government delay passing on the increased cost to end consumers, it runs the risks of more inefficiencies, irking the IMF, another round of circular debt and overrunning the budgeted subsidy for power sector.
Each one of the consequences is a dire one. On the flipside, passing on the increased generation cost and keeping the word to the IMF, will have consequences of its own. No one willingly pays more for anything at anytime, and least so, when the political situation is as charged up as it is these days. It will all come down to how the government weighs the political angles of such a decision.
The overbilling episode has just made matters worse. It would have been lot easier to justify the tariff increase, had there been a visible respite in load-shedding. Punjab, especially, has continued to suffer long hours of load-shedding. Being the political support centre for the ruling party, even a 4 percent increase, no matter how mild it sounds, will have its downsides. Mostly because the opponents, who are already out on the streets, will try play it more than it warrants.
Some believe that the IMF may show leniency in this regard, keeping in view the warfronts the government has to deal with. The fund has history of showing a human face in tough times - 2010 super-floods are an example. But others are not so hopeful. BR Research sources in donor agencies say that, "It will be very difficult for the IMF to conclude the fourth review (let alone subsequent reviews) without progress on power tariffs. Dars statement may mark the moment when the IMF programme started to come off the rails."
To top that off, the sector receivables have now increased by Rs100 billion to Rs485 billion. Bear in mind, the circular debt was supposedly mopped up last year. The cabinet also discussed providing direct one-time subsidy for alleviation of consumer concerns, something which could backfire and may not please the fund.
The core of the issue, which just got a passing mention in the cabinet meeting, is the fuel mix. The minutes read, "there has been little to no change in the fuel mix over the past one year". Do whatever you want to with tariffs; this fuel mix is just not sustainable.
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